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Recently, the yellow metal has outperformed stocks, as we can see by comparing the streetTRACKS Gold Trust (GLD - commentary - Cramer's Take), the ETF that mimics the price of gold, with S&P 500 Depositary Receipts (SPY - commentary - Cramer's Take). The relative strength indicator in the lower panel of the chart below broke upward through the down-sloping orange trend line two weeks ago; this shows that gold is now outperforming SPDRs. Note how the indicator went higher while the price of the streetTRACKS Gold Trust fell (marked by a black vertical line). This is a positive divergence. Lastly, both the relative strength indicator and the gold ETF have printed inverted head-and-shoulders patterns; this suggests that the gold ETF has bottomed.
Gold has also outperformed bonds, as seen on the relative strength indicator in the lower panel of the chart below, which compares the gold ETF with the iShares Lehman 20+ Year Treasury Bond Fund (Amex - commentary - Cramer's Take).
In addition, gold is doing better than the Dollar Index. The relative strength indicator below for a continuous gold futures contract against the Dollar Index has broken above a five-month downtrend line and has made a higher high.
One of the more compelling reasons to be bullish on gold is the impending breakdown on the weekly chart of the Dollar Index below.
Since April's selloff (point 1), the Dollar Index has labored higher. In what appeared to be a breakout, the Dollar Index actually traded above an 11-month downtrend line and the 40-week moving average for about a week (point 2). Despite being above these technical levels, the Dollar Index failed to follow through, and it did not make a significant upthrust pivot. This demonstrates weak momentum. Consequently, it has fallen back below the orange internal support trend line and is barely trading below the shorter-term black uptrend line (point 3). Lower prices for the Dollar Index should be expected, and a close below pivot-point support at $84.70 would confirm this. If this turns out to be the case, it wouldn't surprise me to see $80 tested. A close above the 40-week moving average would suggest that my analysis is wrong. Gold-mining stocks are also turning higher, as reflected by the indicator in the bottom panel of the chart below, which is the percentage of stocks among the 15 largest miners that are trading above their 40-day moving averages. Recent bottoms in the indicator are noted by green vertical bars.
The most important reason to be bullish is the price structure of streetTRACKS Gold Trust.
The significant upthrust pivot (point 1) on the daily chart above suggested that the ETF's downtrend was ending. Since then, it has consolidated into an inverse head-and-shoulders pattern. On Monday, the ETF gapped above the significant pivot high at $59.76, its 200-day moving average and the downsloping trend line drawn from the May top. Volume was above average, but the close was weak as it slid back below the 200-day moving average. The downtrend for the gold ETF is almost over. In addition to the good price action, the on-balance volume indicator in the bottom panel is also supportive, as it is leading the ETF higher, having already broken above a long-term downtrend line. A close below $58.40 would be reason to give up on a bullish bet on this ETF, as the price pattern would be busted. In the end, gold isn't supposed to go higher. We're told that inflation is low. But in a world where hot money is looking for returns, gold, which has been lagging bonds and stocks over the past six months, may start to shine again.
At the time of publication, Lerner was long streetTRACKS Gold Trust, although holdings can change at any time.Guy Lerner is an anesthesiologist and freelance writer who trades for his own account. He blends technical and fundamental analysis to find factors that lead to sustainable moves in the markets. Lerner's approach is research-driven and focuses on supply-demand issues, investor sentiment, intermarket relationships and monetary liquidity. He is a member of the Market Technicians Association and is the founder of TheTechnicalTake.com, a Web site that offers content, commentary and strategies for investors and traders. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. He appreciates your feedback and invites you to send your comments by clicking here.
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